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As of this writing, the Dow Jones Industrial Average has pulled back 6.40% from its post bear market high set January 19th while at its intra-day low a week ago Friday it had pulled back 8.40% from that same level. Similarly, the Standard & Poor’s 500 has pulled back 7.15% from its post bear market high set January 19th and at its worst 9.20% intra-day a week ago Friday. We outline the extent of this pullback because of the inordinate, yet understandable level of anxiety it has caused investors.
Investors are worried and were downright panicked a week ago, not due to the fact that stocks were nearing a ten percent correction, but due to the fact that they have gone nowhere for the past ten years and during which suffered two unprecedented bear markets of more than fifty percent with the most recent being the one that concluded last March ninth. We liken the anxiety investors are experiencing to that of a parent who allows his son/daughter to borrow their car who then subsequently gets into an accident. Forever after, you are constantly worried that another, more severe accident is to follow. Investors are in the same boat. We have already suffered the bear markets noted above and we do not want to go back down there again. We wonder if this is the first leg of another bear market. We don’t want to see our portfolios crushed again. This time, we vow, we will take preventive measures. Now before we describe a couple of those preventive measures, let’s put the current pullback in context.
According to Ned Davis Research there have been 93 corrections of ten percent or more since 1928, one an average of every 322 calendar days. Furthermore, since the March 9, 2009 bear market low there have been approximately 332 calendar days, all without a correction of ten percent. Therefore, according to the law of averages, we are due for a correction.
Ned Davis Research goes on to further note that during the five year bull market that concluded during October 2007, the S&P 500 went 1,673 calendar days without a correction of 10% or more, the second longest such time period. This lack of volatility then and the heightened level of volatility now is also the reason investors are anxious. They are not used to or comfortable with it.
If you are losing sleep over the pullback, take a little money off the table. Skim some of those profits you have made in the stock market and put them into a money market or a short-term bond fund. Trade your high octane stocks for those that pay high dividends or swap out of emerging market funds for balanced funds. Be prudent. Sell high and wait to buy back low and if that time doesn’t come, don’t look back and chastise yourself. You have done the right thing, even if it didn’t, in hindsight, prove profitable.
THE BOTTOM LINE – Everything in moderation. This is most likely a correction in an ongoing cyclical bull market. It is normal and should be expected. We believe that there will be enough good news coming out over the next several months to counter the bad news, which unfortunately, will most likely keep us in a trading range of ten percent on either side of where we closed 2009.